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When a partial reform equilibrium turns bad: The tale of Slovenia’s collapse

When a partial reform equilibrium turns bad: The tale of Slovenia’s collapse. IGOR GUARDIANCICH igu@sam.sdu.dk http ://www.mwpweb.eu/IgorGuardiancich / ANNUAL MEETING OF THE DANISH SOCIETY FOR EUROPEAN STUDIES AARHUS UNIVERSITY, AARHUS, 25-26 SEPTEMBER 2014. Decline visualized. The rise.

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When a partial reform equilibrium turns bad: The tale of Slovenia’s collapse

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  1. When a partial reform equilibrium turns bad: The tale of Slovenia’s collapse IGOR GUARDIANCICH igu@sam.sdu.dk http://www.mwpweb.eu/IgorGuardiancich/ ANNUAL MEETING OF THE DANISH SOCIETY FOR EUROPEAN STUDIES AARHUS UNIVERSITY, AARHUS, 25-26 SEPTEMBER 2014

  2. Decline visualized

  3. The rise • High GDP growth in 1993-2008 (4.3% p.a.) • very stable in time • Low unemployment in 1991-2008 (6.9% on average) • declining to 4.3% in 2008 • Relatively high employment rates in 1996-2008 • from 61.7% to 68.6% • Balanced budget until circa 2000 then deteriorating • comparatively low deficits • Balanced CA until 2003 then deteriorating • comparatively low deficits • Low inequality and low poverty • Gini was 0.246 in 2004; at-risk-of-poverty rate up to 12.3% in 2005-8 Best pupil in class and role model for the rest of CEE… …but imbalances and structural problems kept piling up after 2000.

  4. Source: EBRD

  5. Source: EBRD

  6. Source: EBRD

  7. Source: EBRD

  8. Gradualism and consensual politics • Gradual transformation • from self-management to a market economy • costs distributed over time in terms of unemployment and social risk • harmed groups compensated, preventing social unrest and political instability • improved economic decisions by both the state and individuals due to reduced uncertainty • Reasons • consensual decision-making (broad coalitions under LDS) • early, endogenous transition (low elite circulation) • high starting point of development • dissolution of Yugoslavia and ensuing unstable politics, which cautioned against shock therapy

  9. Competitive neocorporatism • Micro-level survival coalitions between workers and management • work intensity and functional flexibility compensated with • high job security, limitations to dismissals, wage protection, generous pensions • Macro-level institutionalized social pacts • wage moderation to comply with Maastricht exchangedwith • permanent decision-making role for economic, wage, social policy • Reasons • strongest social partners in CEE • stabilized union density at 40%, compulsory GZS/OZS membership • inflationary pressures and general strikes in 1992 • political exchange as conditio sine qua non for democratic survival

  10. Technology intensive manufacturing • Rising share of complex manufacturing • from 32% to 41% in 1995-2007 • from 27% to 33% of labour force employed • from 42% to 50% of complex exports on total • World Bank (2007) • “[t]he shift towards higher technology exports is particularly evident in the Visegrád countries and Slovenia” • Bohle and Greskovits (2012) • Slovenia as semicore country in international economic integration; that is, a country where skilled labour and autonomous management are abundant, but which has to rely on external sources for technology, capital and global entrepreneurship

  11. Source: Eurostat

  12. The fall Source: Eurostat

  13. Source: Eurostat

  14. Source: Eurostat

  15. The perils of protracted gradualism Gradualism may have negative long-term consequences as“short-term winners [may] stall the economy in a partial reform equilibrium that generates concentrated rents for themselves, while imposing high costs on the rest of society”. Hellman (1998) • Ownership Transformation Act of 1992 • 50% of the economy in state hands (owned or controlled) • managers unaccountable • Privatization of major state-owned banks 2001-2 • discredited due to ‘national interest’ • only CEE country with majority of banks under state ownership • Second privatization wave 2004-8 • management buyouts allowed on a massive scale • selective sale of state assets to political ‘friends’

  16. Cheap credit and management buyouts • Economic boom in 2004-8 • Abundant liquidity and low interest rates • Bank borrowed short-term and lent long-term • for housing, real estate, M&A, MBOs • with poor collateral (real estate or stock)… • …and unsustainable leverage • loan-to-GDP ratio from 40% to 90% • loan-to-deposit ratio from 0.95 to 1.64 • Legislation was tightened too late • the anti-tycoon war started when the buyout spree was over • Regulatory supervision was very poor • BoS, ATVP, UVK preeminently failed in their tasks Source: adapted from Damijan (2012)

  17. Bubbles (2004-8) and NPLs Bubbles: Stock market (capitalization of shares) +253% Real estate (housing prices) +51% Construction (gross VA) +72% Net external debt (share of GDP) +34% NPLs: Bad claims in banks (share of GDP) +22% Source: adapted from Damijan (2012)

  18. Political polarisation and the exhaustion of neocorporatism • End of consensus building after Janša I in power • increased ideological antagonism (‘cadre tsunami’) • political polarisation • end of broad coalitions • End of social dialogue • social partners eliminated from decision-making under JanšaI • GZS/OZS membership voluntary • micro-exchanges insufficient, leading to wildcat strikes • sharp decline in union density • radicalization in both labour and business demands Since 2004 radical reforms are impossible to achieve. The most spectacular was Pahor’s failure to win 4 referenda in 2011. The abandonment of structural reforms pushed Slovenia into a bad equilibrium. Policy paralysis implied that banking sector restructuring and fiscal consolidation were delayed by 4 years.

  19. Deteriorating competitiveness and the debt overhang • Partial reform equilibrium leading to competitiveness deterioration • VA per employee in complex manufacturing fluctuated between 55.6% to 60.8% of EU average (now less than 60%) • in NMS it rose by 13.9 pp in CZ, 7.5 HU, 30.8 LT, 19.2 SK • Bad equilibrium since 2008 • debt overhang • 27-36 per cent of GDP, affecting 13 thousand firms (3,175 non-viable) • mass bankruptcy would eliminate 13.0% VA, 14.4% employment, 7.1% exports • lost cost competitiveness • min wage hike (23%), Virant public wage reform, high 2008-9 indexation • increasing unit labour costs grew out of line with labour productivity • short-term anti-crisis measures encouraged wage inertia and labour hoarding • real effective exchange rate (REER) has deteriorated vis-à-vis the Eurozone Exports are rising less than the recovery in major trading partners.

  20. Per employee GDP and nominal compensation (2014) Source: AMECO

  21. Conclusions Requirements for a recovery debt restructuring plan for viable corporates, exit through more efficient bankruptcy and insolvency rules for non-viable firms reduced labour taxes, differentiated minimum wages, lower public wages to regain cost competitiveness successful autonomous disentanglement to recover the input and output legitimacy in policymaking

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